-
STUART W. GOLD
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SUSAN WEBSTER MARK I. GREENE SARKIS J EBEJ IAN
(212) 474-1072 OF COUNSEL PAU L C. SAU N DERS
December 3, 2012
Inv. No. 337-TA-794
Dear Secretary Barton:
I respectfully submit these comments on behalf of Qualcomm
Incorporated in response to the Notice of Commission Determination
to Review the Final Initial Determination; Schedule for Filing
Written Submissions on the Issues Under Review and on Remedy,
Public Interest, and Bonding in the Matter of Certain Electronic
Devices, Including Wireless Communication Devices, Portable Music
and Data Processing Devices, and Tablet Computers, Inv. No.
337-TA-794, issued on November 19, 2012 (the "Commission Request").
My comments below specifically address Requests numbered (1) and
(2) in that Notice.
1. STATEMENT OF INTEREST
Qualcomm applauds the Commission for recognizing the substantial
interest of non-parties in the issues for which it has sought
comments, and is grateful to the Commission for inviting and
considering its comments. Qualcomm is one of the world's leading
communications technology development and licensing companies.
Understanding that research and development ("R&D") is the
lifeblood of innovation, Qualcomm invests enormous amounts in
developing new technologies, in particular cellular communications
and other advanced communications technologies: $3 billion in 2011,
rising from $2.5 billion the year before. Qualcomm also holds a
significant patent portfolio covering its inventions, containing
over 33,000 patents, which it licenses worldwide to more than 200
licensees, and Qualcomm has over 77,000 patent applications pending
worldwide. In addition, Qualcomm is a leading supplier of chipsets
for wireless devices, and is the fourth largest chipset supplier in
the world. Qualcomm also licenses intellectual property from third
parties. Because industry standards are prevalent for cellular
devices and infrastructure equipment, as well as other
communications products, Qualcomm is a very active and longstanding
participant in
-
numerous Standard Setting Organizations ("SSOs"). As a member of
the European Telecommunication Standards Institute ("ETSI")-the SSO
immediately relevant to the issues before the Commission in the
present proceeding-Qualcomm has actively participated over the
years in multiple deliberations within that organization concerning
proposals to change ETSI's intellectual property policy as it
relates to Fair, Reasonable, and Non-Discriminatory ("FRAND")
commitments l and licensing of standards-essential patents
("SEPs").
2
Qualcomm's business model situates it at the intersection of the
licensor/implementer tension. Since Qualcomm is both a technology
licensor and a supplier of chip sets for incorporation into
equipment that implements standardized technologies, Qualcomm' s
business success depends on access to others' patents and the
ability to monetize (and if necessary enforce) its own
patents-including SEPs2 and other, non-standards-essential patents.
Over the years, Qualcomm has participated in ITC investigations as
both a petitioner and a respondent, and has developed a significant
understanding and appreciation of the Commission's role in the
adjudication of intellectual property rights.
Qualcomm is therefore particularly well placed to answer the
Commission's questions about the framework that should be used to
evaluate whether a patent holder's offer of a license to SEPs
complies with an obligation to make such an offer on FRAND terms,
and whether a patent holder's FRAND undertaking engages the public
interest exception to the availability of an exclusion order under
Section 337 of the Tariff Act.3
II. A FRAND COMMITMENT IS A CONTRACTUAL OBLIGATION BETWEEN THE
PATENT HOLDER AND THE SSO, AND SHOULD BE INTERPRETED ACCORDING TO
PRINCIPLES OF CONTRACT LAW.
The Initial Determination concluded that certain Apple products
do not infringe four U.S. patents held by Samsung.4 Two of those
patents had been disclosed by Samsung as potentially essential to
practicing the UMTS cellular communications
1 Because the ETSI Intellectual Property Rights ("IPR") Policy
uses the term "fair, reasonable, and non-discriminatory", we use
the term FRAND undertaking or FRAND commitment in this submission
with reference to the ETSI policy and undertakings made to ETSL
Other IPR Policies, such as those of the ITV and IEEE, call for
undertakings on "RAND" terms, and FRAND/RAND are commonly used
interchangeably.
2 While this submission refers to SEPs, we note that the FRAND
undertaking requested in the ETSI IPR Policy relates to "ESSENTIAL"
IPRs-i.e., IPR(s) "to the extent that the IPR(s) are or become, and
remain ESSENTIAL to practice" the standard. See ETSI Rules of
Procedure, 30 November 2011, Annex 6 - Appendix A: IPR Licensing
Declaration forms [hereinafter ETSI IPR Policy],
www.etsi.org/website/aboutetsi/iprsinetsi/iprsinetsi.aspx.
3 19 V.S.c. § 1337(d)(l).
4 Commission Request at 2.
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standard promulgated by ETSI,5 and for both of those patents
Samsung made a FRAND commitment to ETSI. As to these, the ALJ held
that the terms offered by Samsung complied with its FRAND
obligation.6
3
The Commission's first two Requests concern the enforcement of a
FRAND commitment by the lTC. First, the Commission asks whether the
existence of a FRAND undertaking ipso facto precludes issuance of
an exclusion order under all circumstances, and in light of the
Commission's statutory mandate.7 Second, the Commission asks what
analytical framework should be used to determine whether an
offer-if made-complies with a FRAND undertaking. 8
At the outset, we note that, if the ALJ correctly held that the
Apple products at issue do not infringe the two patents that
Samsung disclosed to ETSI, then there is no FRAND obligation at
issue in the present case. This is because if the patents are not
infringed by the accused standards-compliant products, then they
are not in fact essential.9 And, while ETSI requests that members
making a technical proposal for a standard disclose any of that
member's IPR which "might be" essential if that proposal is
adopted,IO the FRAND undertaking itself only relates to the
licensing of patents that actually "are or become, and remain"
essential. l ! Thus, the lTC Staff were correct in recognizing that
Samsung's declarations to ETSI on their own merely establish that
"Samsung may have FRAND obligations".12 If, however, the Commission
reverses the
5 Certain Elec. Devices, Including Wireless Commc 'n Devices,
Portable Music and Data Processing Devices, and Tablet Computers,
Inv. No. 337-TA-794, at 454,464 (Sept. 14,2012) (Final Initial
Determination) [hereinafter Initial Determination].
6 Id. at 469-70.
7 "Does the mere existence of a FRAND undertaking with respect
to a particular patent preclude issuance of an exclusion order
based on infringement of that patent? Please discuss theories in
law, equity, and the public interest, and identify which (if any)
of the 337(d)(l) public interest factors preclude issuance of such
an order." Commission Request at 3.
8 "Where a patent owner has offered to license a patent to an
accused infringer, what framework should be used for determining
whether the offer complies with a FRAND undertaking? How would a
rejection of the offer by an accused infringer influence the
analysis, if at all?" Id
9 One exception to this rule, inapplicable here, applies to
patents that are essential to an optional portion of a standard. In
this circumstance, one could implement one "option" set out by a
standard without infringing a patent essential to another
"option".
10 Initial Determination at 471 (quoting ETSI IPR Policy at §
4.1) (emphasis added).
11 ETSI IPR Policy, Appendix A ("[T]he Declarant hereby
irrevocably declares that it and its AFFILIATES are prepared to
grant irrevocable licenses under its/their IPR(s) on terms and
conditions which are in accordance with Clause 6.1 of the ETSI IPR
Policy, in respect of the ST ANDARD(S), TECHNICAL SPECIFICATION(S),
or the ETSI Project(s), as identified above, to the extent that the
IPR(s) are or become, and remain ESSENTIAL to practice thatlthose
STANDARD(S) or TECHNICAL SPECIFICATION(S) . ... " (emphasis added))
(IPR Licensing Declaration forms).
12 Initial Determination at 460 (emphasis added).
-
Initial Determination and finds that the patents are both
infringed and essential, and with respect to other circumstances
involving SEPs, then the remarks below are relevant.
4
The starting point is to recognize a FRAND commitment for what
it is: an enforceable contract voluntarily entered into by private
parties, rather than a creation of statute, economic theory, or
abstract public policy. No legislative, executive, or judicial body
has created FRAND undertakings and imposed them on holders of SEPs.
Instead, a patentee voluntarily makes a FRAND commitment to an SSO
as part of the SSO's standards-setting work, and implementers of
the standard are third-party beneficiaries of that contractual
commitment. 13 Courts across this country have recognized the
contractual nature of a FRAND commitment,14 and have rightly
indicated that they will enforce a patentee's voluntary,
contractual FRAND undertaking.
Because a FRAND commitment is a creature of contract, its
content-like that of any contract-must be found by means of
ordinary principles of contract interpretation, looking first to
the plain meaning of the agreement, and then, where not clearly
answered by the agreement's plain language, to the intention and
understanding of the parties who formed the contract at the time of
formation. The "parties" to a FRAND undertaking are the SSO that
has promulgated an IPR policy on the one hand, and the SSO member
and patent owner who makes a FRAND commitment under the terms of
that policy on the other. Three lines of inquiry will shed the most
light on the "intent of the parties". First, the Commission (like
any court) should look to the written agreements, policies, and
procedures of the relevant SSO at the time the particular FRAND
commitment was made. 15 Second, the Commission should look to the
deliberative history of the IPRpolicy at issue within the SSO that
has framed that policy. The history of deliberations and debates,
including the adoption of some proposals and rejection of others,
can say much about both the "intent" and the understanding of the
SSO and its members. Third, the Commission should look to licensing
and negotiation
\3 See Microsoft Corp. v. Motorola, Inc., 864 F. Supp. 2d 1023,
1032 (W.D. Wash. 2012) ("Additionally, the court reaffirms its
prior decision that Microsoft, as a potential user of the 802.11
Standard and the H.264 Standard, is a third-party beneficiary to
the agreements between Motorola and the IEEE and Motorola and the
lTV.").
14 See, e.g., Research in Motion Ltd v. Motorola, Inc., 644 F.
Supp. 2d 788, 797 (N.D. Tex. 2008) (declining to dismiss breach of
contract claims based on alleged broken promise to license on FRAND
terms); Ericsson Inc. v. Samsung Elecs. Co., No. 2:06-CV-63, 2007
WL 1202728, at *2-3 (E.D. Tex. Apr. 20, 2007) (recognizing that a
dispute on FRAND terms is a contractual dispute and separate from
questions of patent law).
15 Similarly, in the context of interpreting the meaning of SSO
disclosure obligations, Administrative Law Judge Pender was
precisely correct when he wrote that "the sine qua non for ... any
analysis for unclean hands, as it would pertain to this case, are
the written ETSI agreements, directives, policies, procedures,
etc., establishing Motorola's duty or obligation of disclosure".
Certain Wireless Commc 'n Devices, Portable Music and Data
Processing Devices, Computers and Components Thereof, Inv. No.
337-TA-745, at 148 (Apr. 24, 2012) (Initial Determination on
Violation of Section 337).
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custom and practice in the relevant industry, which will have
much to do with what the participants in that industry consider to
be "reasonable".16
These are all fact-specific inquiries, and as a result FRAND
cannot be treated as an abstract and unitary legal rule. While many
SSOs have developed comparable FRAND-based IPR policies, 17 FRAND
commitments do vary between different SSOs-and over time within an
individual SS018_as the IPR policies of SSOs evolve. In the case
presently before the Commission, the task is to analyze the intent
of the parties to the IPR Policy of ETSI at the time the relevant
FRAND commitment was made.
5
The Commission should thus give little or no weight to proposals
for analytical frameworks to determine compliance with FRAND that
are not grounded on its plain meaning or the intent of the parties
to the FRAND commitment, as ascertained through ordinary principles
of contract interpretation. Evaluating a FRAND commitment under
principles of contract interpretation is correct as a matter of law
and fact. It is also important as a practical matter. Giving effect
to the parties' intent ensures that commitments made to SSOs have
the same consequences as any other contractual agreements regarding
valuable IPR-stability and fundamental fairness for all
participants. This stability, in tum, encourages greater
participation in standardization by all interested parties,
regardless oftheir business model. SSOs facilitate private
efficiency-enhancing coordination in the marketplace by brinlf,ing
together participants with varying interests-chiefly innovators and
implementers. 9 SSOs are able to function so long as they adopt
rules that make acceptable tradeoffs between the competing
interests of their members and do not undermine the ability to
attract broad membership.20 One such tradeoff has been the adoption
of flexible but binding FRAND-
16 See Initial Determination at 470 (holding that Samsung's
offer complied with its FRAND obligation and specifically noting
the lack of "evidence of customs and practices of industry
participants showing that Samsung's demand is invidious with
respect to Apple").
J7 For instance, we are not aware of any SSO IPR policy that
includes a blanket exclusion of injunctive or similar relief for
patents subject to a FRAND commitment.
J8 For example, § 6.1 of the ETSI IPR Policy provides:
"When an ESSENTIAL IPR relating to a particular STANDARD or
TECHNICAL SPECIFICATION is brought to the attention of ETSI, the
Director-General of ETSI shall immediately request the owner to
give within three months an irrevocable undertaking in writing that
it is prepared to grant irrevocable licences on fair, reasonable
and non-discriminatory terms and conditions under such IPR ... ".
Id. (emphasis added).
The word "irrevocable" preceding "undertaking" was added by
consensus in 2008 to clarifY that the FRAND undertaking is
irrevocable once made. To be clear, such amendments to an SSO
policy cannot retroactively impact existing FRAND commitments,
which continue to be governed by the policy in place at the time of
the undertaking.
19 See Richard A. Epstein, F. Scott Kieff & Daniel F.
Spulber, The FTC, IP, and SSOs: Government Hold-Up Replacing
Private Coordination, 8 J. COMPETITION L. & ECON. I, 10-13
(2012).
20 See id.
-
based IPR policies. In the case of cellular telephony and ETSI,
empirical real-world experience shows that this very
flexibility-which appears to annoy many commentators-has been
radically successful in: (a) motivating industry participants to
invest heavily in the R&D that has transformed and
re-transformed that industry and the world over the last three
decades; (b) enabling ETSI and other SSOs to develop high-quality
standards utilizing cutting-edge technology; while (c) making the
necessary intellectual property available to implementers on terms
that have enabled rapid growth of the market and repeated entry of
new competitors.2J Efforts by some technology implementers to wield
FRAND commitments as a blunt weapon to reduce their own input costs
for valuable technology to which they did not contribute have
nothing in common with the complex and balanced goals of SSOs, and
no legitimate basis in the cautiously flexible rules that SSOs have
adopted in order to achieve those goals.
III. SAMSUNG'S FRAND COMMITMENT TO ETSI DOES NOT CATEGORICALL Y
PRECLUDE THE ISSUANCE OF AN EXCLUSION ORDER.
A. Under the ETSI IPR Policy, a FRAND Commitment Does Not Waive
the Right to Seek an Exclusion Order Against Unlicensed
Infringers.
6
The historical and documentary record of the ETSI IPR Policy has
previously been investigated in detail, and is well documented.22
The evidence is decisive that the ETSI membership expressly did not
agree-and that ETSI members making FRAND commitments are not asked
to and do not agree-to a categorical waiver of injunctive relief
(including exclusion orders).23
First, the language of the ETSI IPR Policy itself is utterly
silent on the question of injunctive relief in any form (including
exclusion orders). Thus any contention that the right to an
injunction has been waived by an IPR holder making a
21 See generally Keith Mallinson, WiseHarbor, A Compendium of
Industry and Market Analysis Articles on Intellectual Property in
Mobile Communications Standards (June 12,2011),
www.ftc.gov/os/comments/patentstandardsworkshop/00007-60459.pdf;
Roger G. Brooks, Patent "Hold-Up, " Standards-Setting
Organizations, and the FTC's Campaign Against Innovators, 39 AIPLA
Q.J. 435 (2011).
22 See Roger G. Brooks & Damien Geradin, Taking Contracts
Seriously: The Meaning of the Voluntary Commitment to License
Essential Patents on "Fair and Reasonable" Terms, in Intellectual
Property and Competition Law: New Frontiers 389, 395-401 (Steven
Anderman & Ariel Ezrachi, eds., 2011) [hereinafter Brooks &
Geradin, Taking Contracts Seriously]; Roger G. Brooks & Damien
Geradin, Interpreting and EnforCing the Voluntary FRAND Commitment,
9 INT'L J. IT STANDARDS & STANDARDIZATION RESEARCH, Jan.-June
2011, at 1,5-10, available at ssm.comlabstract=1645878.
23 While the ETSI history on this topic primarily pertains to
the availability of injunctive relief, it applies equally to
exclusion orders and cease and desist orders, which are remedies
available from the ITC analogous to injunctive relief. For the sake
of convenience, this discussion focuses on exclusion orders, but
the comments apply to ITC cease and desist orders as well.
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7
FRAND commitment to ETSI would have to be by implication or
inference, an inference strongly disfavored by law.24
Second, no implication or inference that the right to an
injunction has been waived is possible with respect to the ETSI IPR
Policy. Language whereby a patentee making a FRAND commitment would
have waived all right to injunction was debated and briefly
included in an IPR policy adopted in 1993.25 However, when the
current policy was adopted in 1994, that provision was removed.26
The only reasonable inference from this sequence is that the ETSI
membership turned their minds to the question of waiver of
injunction and affirmativelt, decided to exclude any such waiver
from the content of the FRAND commitment. 7
One court, considering both the ETSI and IEEE IPR Policies,
followed exactly this contract-based analysis. In rejecting Apple's
claim that Motorola had waived its right to an injunction based on
its FRAND commitment, the court started by acknowledging that
"whether Motorola breached its contracts with ETSI and IEEE by
seeking an injunction is a question that must be resolved using
principles of contract law, not on the basis of economic policy or
equitable principles". Apple, Inc. v. Motorola Mobility, Inc., No.
ll-cv-178, 2012 WL 5416941, at *15 (W.D. Wis. Oct. 29, 2012). Then,
addressing the IPR Policies of ETSI and the IEEE, the court
recognized that none of the provisions relating to FRAND
commitments expressly preclude injunctive relief, and that Apple
had pointed "to no provisions in the contract from which [the
court] could draw that inference". Id. Finally, to resolve any
doubts, the court held that:
There is no language in either the ETSI or IEEE contracts
suggesting that ... the standards-setting organizations intended or
agreed to prohibit Motorola from seeking injunctive relief. In
fact, both policies are silent on the question of injunctive
relief. Moreover, in light of the fact that patent owners generally
have the right to seek injunctive relief both in district courts,
35 U.S.c. § 283, and in the International Trade Commission, 19
Us.c. § 1337(d), I conclude that any contract purportedly
24 See Groves v. Prickett, 420 F.2d 1119, 1125-26 (9th Cir.
1970) ("As minimum requirements to constitute an 'implied waiver'
of substantial rights, the conduct relied upon must be clear,
decisive and unequivocal of a purpose to waive the legal rights
involved. Otherwise, there is no waiver. ").
25 See, e.g., Brooks & Geradin, Taking Contracts Seriously,
supra note 19, at 406-07.
26 Id.
27 See, e.g., Long Island Univ. Faculty Fed'n, Local 3998 v. Bd.
of Trustees of Long Island Univ., 457 N.Y.S.2d 325,326-27 (N.Y.
App. Div. 1982) (upholding arbitrator's award that viewed as
relevant to a contract's interpretation the removal of a word from
that contract during negotiations).
-
depriving a patent owner of that right should clearly do so. The
contracts at issue are not clear. Id (emphasis added).28
B. The Public Interest Requires the Continued Possibility of
Exclusion Orders Where the Patent-Holder Has Complied with Its
FRAND Undertaking.
While the contractual analysis is decisive, we also point out
that a blanket rule eliminating the availability of exclusion
orders against unlicensed infringers of patents subject to a FRAND
commitment would be contrary to the public interest, which requires
consideration of the facts and circumstances of each case.
8
First, in circumstances where, for example, a patentee has
offered to grant a license on FRAND terms, but the infringer
refuses to negotiate in good faith, a rule eliminating an exclusion
order as a remedy in all circumstances would punish the patentee by
depriving it of the statutory remedy to which it is entitled upon a
showing of infringement of a valid patent, and weaken its
legitimate rights in its patent portfolio. This would undermine the
public interest both in a strong patent system to encourage
innovation and investment-based risk, and in the avoidance of
litigation in favor of reaching negotiated agreements, and it would
also severely and inappropriately penalize the giving of FRAND
commitments, thus impairing the ability of standards bodies to
encourage participation and contribution of new technologies. If
fundamental patent rights are swept away, without regard for the
desires or intent of the SSO members, innovators and contributors
to the standardization process of valuable technology protected by
intellectual property rights would be incentivized to reduce
investments in R&D and shift to a strategy of free-riding on
the R&D investments of others, which will be available at
artificially depressed royalty rates, to decline to contribute
their technologies to standards, and to decline to make FRAND
commitments?9 This, of course, would impede the development of the
best technical solutions available-one of the primary goals of
SSOs. And in some industries and settings, it could lead to the
proliferation of non-complementary and competing proprietary
technologies, rather than standardized complementary ones, thus
diminishing the procompetitive and efficiency-enhancing effects
fostered by standardization.
28 The recent district court decision in Apple, Inc., v.
Motorola, Inc., No. ll-CV-08540, 2012 WL 2376664 (N .D. Ill. June
22, 2012) (Posner 1.), neither refers to nor takes into account
this history, id at * 12-22, and therefore is oflittle persuasive
value on the question of whether a FRAND undertaking pursuant to
the ETSI IPR Policy precludes the availability of injunctive
relief. As the Court in the Western District of Wisconsin observed,
Judge Posner "never refer[red] to the ETSI or IEEE policies as
'contracts"', and cited only "policy and economic arguments, not
contract provisions" when addressing the availability of injunctive
relief after making a FRAND commitment. Apple, 2012 WL 5416941, at
* 14.
29 See Sanofi-Synthelabo v. Apotex, Inc., 470 F.3d 1368, 1383
(Fed. Cir. 2006) ("[T]he encouragement of investment-based risk is
the fundamental purpose of the patent grant and is based directly
on the right to exclude." (internal quotation marks omitted));
Celsis In Vitro, Inc. v. Cel/zDirect, Inc., 664 F.3d 922,931 (Fed.
Cir. 2012) ("We have long acknowledged the importance of the patent
system in encouraging innovation".) (internal quotations marks
omitted)).
-
9
Second, where a standardized product truly faces no meaningful
competitive alternatives, this Commission's statutory mandate
already gives it flexible discretion, under the public interest
exception, to refuse an exclusion order-but only after balancing
other considerations, including the importance of protecting patent
rights and incentives to take licenses voluntarily. By contrast, a
blanket rule against exclusion orders in relation to SEPs subject
to FRAND commitments-regardless of competitive conditions in the
U.S. economy, the availability of "like or directly competitive
articles in the United States", or the actual impact of an
exclusion order on consumers in the U.S.30-would "hold up or
frustrate Section 337 investigations,,31 and strip the Commission
of its ability to address infringing conduct affecting vast swaths
of the economy. The ironic outcome of such a rule would be that the
lTC, which is recognized as one of the most efficient, timely, and
effective venues in the United States for enforcing patent rights,
would be divested of the ability to enforce patents that are often
the most valuable and fundamental to a given technology or
industry. Such a blanket-rule outcome is neither desirable from a
policy perspective nor appropriate from a contractual
perspective.
C. Failure to Offer FRAND Terms to an Implementer Willing to
Negotiate in Good Faith Can and Should Preclude the Patent Holder
from Obtaining an Exclusion Order.
While it is correct that an ETSI FRAND commitment (or a RAND
commitment pursuant to the IPR policy of another SSO) does not
waive or exclude injunctive relief against an unlicensed infringer,
it is also well recognized that a court, after considering all the
relevant evidence, may decline to issue an injunction when the
infringer would in fact be licensed but for the failure of the
patentee to comply with its FRAND commitment. This results from the
doctrine of estoppel within the Common Law context/2 and the same
result is reached under different doctrinal names in Civil L . 33
aw countnes.
A similar result seems appropriate, important, and achievable by
the Commission within the statutory framework of the Tariff Act.
ETSI's purpose in requesting a FRAND commitment is twofold: (i) to
reduce the risk that patents essential to practicing the standard
are unavailable to implementers; and (ii) to make certain that
30 19 U.S.c. § 1337(d)(l).
31 Initial Determination at 462. As the AU noted, "As a
practical matter, if the ITC were precluded from performing its
mandate as set forth in the authorizing statute, an infringing
party could, by making unrealistic counter-offers to the patent
holder, while claiming that such counter-offers more accurately
reflect FRAND than the offers proposed by the patent holder, hold
up or frustrate Section 337 investigations." Id
32 See A.C. Aukerman Co. v. R.L. Chaides Constr. Co., 960 F.2d
1020, 1042 (Fed. Cir. 1992) (en banc).
33 See Samsung v. Apple,
Arrondissementsrechtbank[Rb.],s-Gravenhave, IER 2012, 10 m.nt FE,
at ~~ 4.27-4.39 (Dist. ct. The Hague Oct. 14,2011).
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10
patent holders are fairly and adequately rewarded for the use of
their patents.34 Given the clear intent and the voluntary nature of
the FRAND commitment, the ITC is entitled to conclude, after
reviewing the relevant evidence in a particular case, that the
public interest would be damaged by entering an exclusion order
against a party that would be licensed if the patentee had complied
with its FRAND obligations.
Not surprisingly, at least one ALJ has accepted the fundamental
premise that an equitable FRAND defense may be invoked by an
accused infringer in Commission proceedings-just as it can in a
federal COurt.35 The ITC Staff also advocated this view before the
ALJ in the current matter.36 And this position is correct. The
availability of a FRAND defense is a question that a respondent may
raise in any investigation in which an essential patent subject to
a FRAND commitment has been asserted. That defense should be
evaluated in accordance with the specific, contractual FRAND-based
policy agreed to by the members of the relevant SSO at the time the
commitment was made.
IV. THE PROPER FRAMEWORK FOR DETERMINING WHETHER A PATENTEE HAS
COMPLIED WITH ITS FRAND UNDERTAKING
The Commission's second Request focuses specifically on the
proper methodology to be used to determine whether an offer
complies with a FRAND undertaking. The Commission's Request sets
the correct conceptual framework: given the nature and function of
a FRAND commitment within the context of the ETSI IPR Policy, the
question facing the Commission (like a court in a similar context)
is not "What is the FRAND royalty or terms for these patents?", but
rather, "Has the patentee acted in a manner inconsistent with its
undertaking to offer to grant licenses on FRAND terms?"
A. An Offer Is Only the First Step in a Two-Party Negotiation
Process.
As an initial matter, there is no structural barrier to the IIC
considering whether an offer complies with FRAND.37 Yet the
enforcement of a FRAND commitment may, under particular facts, not
be one that admits of a quick and easy decision by the Commission
or a court. By its very nature, intellectual property licensing
(like other commercial discussions) often involves long and complex
negotiations, begun with an offer or a request for an offer, and
continued-often over substantial periods of
34 ETSIIPRPolicy §§ 3.1-3.2.
35 See Certain Wireless Commc 'ns Equip., Articles Therein, and
Prods. Containing the Same, Inv. No. 337-TA-577, 2007 WL 1221125,
at *4 (Feb. 22, 2007) (Order) (denying summary determination on an
equitable FRAND defense because "there are material issues of fact
as to" detrimental reliance).
36 Initial Determination at 460.
37 See Comments of Qualcomm Incorporated, July 9, 2012, Certain
Wireless Commc'n Devices, Portable Music and Data Processing
Devices, Computers and Components Thereof, Inv. No. 337-TA-745, at
7 (June 25, 2012) (Notice of Review).
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11
time-with subsequent bargaining for various and often
interlocking forms of consideration. A patent holder's obligation
to make a FRAND offer therefore marks only the very beginning of
the back-and-forth negotiation process through which a patent
holder and implementer reach ultimate agreement on FRAND terms.
Nothing in the terms or the history of the ETSI IPR Policy suggests
any intent to permit an infringer simply to dispense with
negotiation by walking away and suing if it does not like the first
offer. On the contrary, ETSI has explicitly indicated its intent
that parties continue to rely on private negotiations to set
license terms.38 And in fact, this is how the overwhelming majority
of licenses for SEPs have been negotiated and concluded for
decades.
Whether the patent holder has complied with its FRAND
undertaking is therefore a question that cannot and should not be
answered solely on the basis of the initial offer. Because the
natural course of any negotiation involves the parties' attempts to
pull each other's preferred position in one direction or
another-either by changing the royalty rate itself or through other
terms of the agreement, such as the royalty base, fixed or lump-sum
payments, royalty caps and minimums, other forms of financial
consideration, or non-financial terms such as cross-licensing
rights and termination rights-the opening offer can be seen to
fluctuate along a range of possible structures and terms at various
stages of the negotiations, before settling in the final agreement
of the parties.39 A patent holder's decision on what to make as an
opening offer is therefore heavily affected by how that patent
holder expects negotiations to unfold, meaning that the offer may
reasonably vary depending on the creditworthiness of the
counterparty and any number of other factors, including the
proposed scope of the license and length of the license term, the
downstream exhaustion implications of licensing this particular
counterparty, potential cross-licensing value and other forms of
value-creating commercial relationships between the parties, and
more.
B. FRAND Allows for a Range of Possible Outcomes.
Moving from process to substance, it is also critical to
answering the Commission's second Request to understand that the
terms "fair" and "reasonable" are on their face broad and
permissive words. "Fair and reasonable" does not point to a
singular answer. The question raised by a FRAND defense is not
"What are the theoretically correct royalty terms and has the
patentee offered those terms?", but "Has the infringer
38 See ETSI Guide on IPRs, § 4.1 (Nov. 30,2011) www
.etsi.orglWebSite/documentiLegaI/ETSI%20Guide%200n%20IPRs%20November%2020
11. pdf ("Specific licensing terms and negotiations are commercial
issues between the companies and shall not be addressed within
ETSI."); Brooks & Geradin, Taking Contracts Seriously, supra
note 19, at 399-400 (noting that attempts to define FRAND or terms
that are not FRAND were rejected by ETSI in 2003 and 2006).
39 As the ALJ noted, "Patents have the attributes of personal
property" and "Their value, in terms of licensing, varies according
to a myriad offactors". Initial Determination at 469 (citing 35
U.S.C. § 261). "Furthermore, negotiations often involve a process
of offer and counteroffer before the parties arrive at an agreed
price". Jd. at 470.
-
met its affirmative burden of proof to show that the offered
terms, taken as a whole, fall outside the range that can be
considered 'fair and reasonable,?".4o
12
This flexible "range of reasonableness" understanding of FRAND
finds support in the history of the ETSI IPR Policy and its twin
objectives: reducing the risk that SEPs are unavailable to
implementers41 , while also ensurin~ that "IPR holders ... [are]
adequately and fairly rewarded for the use of their IPRs".4 It is
clear from the ETSI IPR Policy negotiating history that the ETSI
membership never intended to reduce the meaning of FRAND to a
single or mathematical benchmark. On the contrary, the consensus of
ETSI members has consistently resisted and rejected efforts to
define FRAND in a manner that might upset the balance that was
struck in the 1994 policy text.43 Thus, post-1994 proposals that
would have modified the meaning of FRAND within the ETSI IPR Policy
in a more mechanical direction (most of which were directed at
advancing a particular commercial interest) have never been
accepted by ETSI, nor have efforts to have ETSI identify specific
examples of "bad practices" that would be deemed non-FRAND.44
The ETSI IPR Policy also provides no support for the notion that
any of the parties reasonably expected to radically alter the
ordinary incentive-scheme created by patent law. Nor would altering
this scheme make sense: standardized technologies are available
only after innovators have spent tremendous amounts of money on
high risk R&D, and turning the standardization process into a
mechanism for coercing below-market compensation for SEPs would
simply enable implementers to enjoy a free ride-certainly an
unsustainable plan for long-term, continued innovation.
The question "What is a FRAND offer?" must therefore take into
account real-world licensing practices and established values for
licensed portfolios, as well as acknowledge that FRAND allows for a
range of possible opening offers and a range of possible
outcomes.
C. Adherence to Accepted Licensing Terms Should Provide a "Safe
Harbor" for FRAND Offers.
The specific facts may in some cases permit a relatively easy
resolution of the question of whether a licensor has offered terms
within the "range of reasonableness". It would defy language and
logic to conclude that a patentee who offers terms generally
consistent with those that have been previously accepted by
significant and sophisticated licensees for this same portfolio (or
these same patents) under similar commercial
40 Brooks & Geradin, Taking Contracts Seriously, supra note
19, at 401-02.
41 ETSI IPR Policy § 3.1.
42 Jd. § 3.2.
43 Brooks & Geradin, Taking Contracts Seriously, supra note
19, at 399.
44 See id. at 400-01.
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13
circumstances has acted "unreasonably".45 In a free-market
economy where values are primarily defined by market negotiations,
it would be perverse and almost meaningless to say that terms that
have achieved significant industry acceptance are nevertheless
"unreasonable" .
While the Commission is never tasked to measure "patent
damages", it is noteworthy that for reasons similar to those above,
the multi-factor Georgia-Pacific "reasonable royalty" analysis
gives pride of place to two factors that capture these same issues
of market acceptance of similar terms for the same or similar
patents: (l) "The royalties received by the patentee for the
licensing of the patent in suit, proving or tending to prove an
established royalty"; and (2) "The rates paid by the licensee for
the use of other patents comparable to the patent in suit".46
Of course, new patentees and first-time licensors will have a
harder time making such a showing, but where an infringer asserts a
FRAND-based defense against such patents, and the patent holder
does not have the factual record to demonstrate historical industry
acceptance, the Commission will have to look to other yardsticks of
"reasonableness", as courts performing damage analyses under
Georgia-Pacific likewise do. An inquiry into whether certain
licensing terms offered by the patentee fall within FRAND's "range
of reasonableness" will need to consider other relevant factors,
including licensing agreements negotiated by other licensors for
similar patent portfolios. But again, it remains important to
remember that the Commission, when evaluating a FRAND defense,
faces a different task than does a court conducting a
Georgia-Pacific analysis; unlike a court, the Commission need ask
(and answer) only whether the patentee has made a reasonable
offer-not what a final and singular "right" set of license terms
would be. It also bears emphasizing that the FRAND obligation (and
thus the "reasonableness" analysis) relates to an entire package
oflicense terms considered together-not to a royalty rate standing
alone. If a reasonable member of the licensing community would have
believed the offer made to have been fair and reasonable taken as a
whole, that offer is FRAND.
45 Thus, the Western District of Washington recently considered
Motorola's offer of numerous licensing agreements suggesting that
it had received comparable royalty rates to those offered to
Microsoft in relation to its SEPs, and concluded that, "with
respect to any RAND obligations Motorola has with respect to
Microsoft ... the court must engage in a factual comparison between
the circumstances of each prior agreement and the circumstances
that exist between the parties to this litigation". Microsoft, 864
F. Supp. 2d at 1039.
46 Georgia-Pacific Corp. v. u.s. Plywood Corp., 318 F. Supp.
1116, 1120 (S.D.N.Y. 1970), modified and aff'd, 446 F.2d 295 (2d
Cir. 1971). Courts have noted that evidence of royalties agreed to
by others for the particular patent in suit is particularly
probative of the "reasonable royalty". See LaserDynamics, Inc. v.
Quanta Computer, Inc., 694 F.3d 51, 79 (Fed. Cir. 2012) ("Actual
licenses to the patented technology are highly probative as to what
constitutes a reasonable royalty for those patent rights because
such actual licenses most clearly reflect the economic value of the
patented technology in the marketplace."); Atl. Thermoplastics Co.
v. Faytex Corp., 5 F.3d 1477, 1482 (Fed. Cir. 1993) (relying on
royalty offered by the patentee to a third party to support a
reasonable royalty determination); see also Maxwell v. J. Baker,
Inc., 86 F.3 d 1098, 111 0 (Fed. Cir. 1996) ("This rate is
supported by evidence that Maxwell entered into agreements with
other licensees at a royalty rate of $.1 0 per pair of
shoes.").
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14
D. The Commission Can Also Consider Evidence of Subjective Good
or Bad Faith.
Because a FRAND undertaking gives rise to what the law
recognizes as a binding preliminary agreement that contemplates the
typically bilateral negotiation of a later agreement to achieve the
ultimate contractual objective of the parties,47 each party is
obligated to negotiate in good faith to achieve the ultimate
contractual objective-i.e., a FRAND license.48 Not surprisingly,
the law of contracts recognizes on the one hand that a breach of
this obligation can be by either party, and on the other hand that
failure to reach agreement does not imply that either party has
acted in bad faith. 49 An infringer that has refused to enter into
good-faith negotiations (within the bounds of commercial
reasonableness) should not in equity be heard to complain that the
patentee is in violation of a FRAND obligation, nor does the public
interest require that it be permitted to do so.so This rule
promotes the efficient use of the Commission's scarce resources and
will reduce the risk that the Commission will be used by the
infringer to gain a tactical bargaining advantage, without having
made its own attempt to reach a license on FRAND terms.
The question of "bad faith" is necessarily a fact-intensive
inquiry,Sl but it is an inquiry that is guided by ample precedent.
Courts have defined good faith generally, and then have evaluated
the parties' conduct to determine whether they have
47 See, e.g., JDTCorp. v. Tyco Grp., S.A.R.L., 13 N.Y.3d 209,
213 n.2, 918 N.E.2d 9l3, 913 n.2 (2009).
48 See, e.g., Microsoft, 864 F. Supp. 2d at 1038 (holding that
under Washington law, negotiation of RAND license "must comport
with the implied duty of good faith and fair dealing inherent in
every contract"); EQT Infrastructure Ltd. v. Smith, 861 F. Supp. 2d
220,227 (S.D.N.Y. 2012) (noting that under New York law, binding
preliminary agreements that leave open terms for further
negotiation '''do not commit the parties to their ultimate
contractual objective but rather to the obligation to negotiate the
open issues in good faith in an attempt to reach the objective
within the agreed framework'" (Brown v. Cara, 420 F.3d 148, 153 (2d
Cir. 2005)); Gillenardo v. Connor Broad. Delaware Co., No. C.A.
98C-06-015 WLW, 2002 WL 991110, at *6 (Del. Sup. Ct. Apr. 30, 2002)
(concluding under Delaware law that evidence established an
enforceable contract requiring parties to negotiate ultimate terms
in good faith).
49 Cf Atl. Track & Turnout Co., v. Perini Corp., 989 F.2d
541,545 (lst Cir. 1993) ("That the MBTA and Perini failed to reach
an acceptable agreement does not show that the attempted
negotiations were in bad faith.").
50 See Initial Determination at 462 ("As a practical matter, if
the ITC were precluded from performing its mandate as set forth in
the authorizing statute, an infringing party could, by making
unrealistic counter-offers to the patent holder, while claiming
that such counter-offers more accurately reflect FRAND than the
offers proposed by the patent holder, hold up or frustrate Section
337 investigations."); id. at 470 ("[NJegotiations often involve a
process of offer and counteroffer before the parties arrive at an
agreed price, but Apple's evidence does not demonstrate that Apple
put forth a sincere, bona fide effort to bargain with
Samsung.").
51 See RGC Int'llnvestors, LDCv. Greka Energy Corp., No. Civ. A.
17674,2001 WL 984689, at *11 (Del. Ch. Aug. 22, 2001) ("A finding
of 'bad faith' is necessarily a fact-intensive inquiry.").
-
acted in bad faith,52 and have, for example, held a defendant to
have engaged in "bad faith" when it attempted to renegotiate
previously agreed issues and ignored the obligation to reach an
expedited final agreement, including by engaging in conduct
designed to force the plaintiff to resort to litigation for the
purpose of causing unreasonable delay. 53
V. CONCLUSION
15
The Commission's inquiry concerning the interaction of a FRAND
commitment and the availability of an exclusion order should be
answered in accordance with the contractual nature of the FRAND
commitment. Doing so here, the meaning of the ETSI FRAND commitment
is found in the text and history of the ETSI IPR Policy, which
clearly establishes that the ETSI membership did not intend that a
FRAND commitment include a waiver of the patent holder's right to
seek injunctive relief in any form. Accordingly, there is no
contractual basis for-nor does the public interest favor-a blanket
rule eliminating the availability of exclusion orders for
infringement of patents subject to a FRAND commitment made pursuant
to the ETSI IPR Policy. Whether an exclusion order should be
granted is a fact-based inquiry that the Commission can and should
decide on a case-by-case basis.
The determination of whether an offer is FRAND is also a
fact-based inquiry. The Commission should assess whether an offer
is FRAND first by asking whether the offer fits within a "safe
harbor" established by prior industry acceptance--or acceptance by
these parties-of similar terms for the intellectual property at
issue. If the offer does not fall within this "safe harbor", the
Commission will be obliged to look to other and often less clear
indicia of reasonableness. The contractual nature of the FRAND
commitment, and the clear intent of ETSI to leave the valuing of
SEPs to the realm of private negotiation, see supra at § IV.B, mean
that, at least in the case of an ETSI FRAND commitment, the
lodestar of "reasonableness" must be market definitions of value
and industry-accepted negotiation practices. Calls for a
redefinition of
52 Gillenardo, 2002 WL 991110, at *8 ("'Good faith' may be
defined as refraining from arbitrary or unreasonable conduct which
has the effect of preventing the other party to the contract from
receiving the fruits of the contract", while "bad faith" "implies
the conscious doing of a wrong because of dishonest purpose or
moral obliquity; it is different from the negative idea of
negligence in that it contemplates a state of mind affirmatively
operating with furtive design or ill will".).
53 See RGC lnt'llnvestors, 2001 WL 984689, at *8-10, *13-14; see
also Gillenardo, 2002 WL 991110, at *8 (holding that the defendant
breached its duty to negotiate in good faith when it stopped
negotiating in anger in light of the plaintiffs proposal, which was
considered unsatisfactory, and made no attempt in good faith to
finalize the ultimate agreement).
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16
"reasonable" based on favored economic theories or
resource-allocation goals untethered to actual industry licensing
practice should therefore be rejected.
The Honorable Lisa R. Barton Secretary
U.S. International Trade Commission 500 E Street S.W.
Washington, DC 20436
VIA ELECTRONIC FILING
Respectfully,
/lOy n:jC'~ Roger G. Brooks